- Are the Design ViewModels needed?
For a custom block, yes, you will need a ViewModel. Typically it'll just be one class unless you're doing some funky layout stuff.
-Does the DLL of the custom application block need to be placed in the bin directory of the config tool?
Yes, this still holds true - if you don't do this, the config tool won't be able to load the custom block and know that it's there.
-Do any XML files need to be added\updated?